Michael Littlewood: If it's broke, throwing borrowed money won't fix it

From the post-Budget rhetoric, it appeared the National-led Government's first Budget had struck at the heart of future retirees' security. Here is what Phil Goff said:

"And the biggest dishonesty is to talk about a commitment to superannuation because there won't be any money to pay for it - they've taken away the certainty New Zealanders rely on."

According to Mr Goff, "[T]he net result will be that future entitlements to super are put at risk."

After a week of headlines, let's look at Labour's claim. Was Mr Goff right? No, he wasn't even a bit right.

The New Zealand Superannuation Fund (NZSF) was only ever going to build up assets to pay for less than 20 per cent of future superannuation payments - the other 80 per cent plus was always to be met by taxpayers of tomorrow, from tomorrow's economy. The NZSF meant that taxes today were definitely going to be about $2 billion a year higher, in exchange for the possibility (not a promise) that they might be lower from 2025 onwards.

The Government will be running cash deficits for the next few years so, with respect to the fund's contributions, it faced two choices - borrowing $2 billion a year or suspending future contributions.

Increasing taxes or reducing "social" spending had been ruled out. In summary, that was Hobson's choice.

Mr Goff argued for the borrowing option or, more accurately, didn't suggest that taxes should go up. Now is the time to be putting money into share markets, he suggested, when markets were at their bottom.

Really? There is in fact no guarantee that markets haven't further to fall. The super fund will be doing really well if, in the next few years, it recovers the losses it has already suffered. All fund managers are in a similar situation so that is no criticism of the fund's guardians (they were doing what they were asked to do). But the question is, do we really want to borrow $2 billion a year for the next 10 years and put it all into sharemarkets in uncertain times?

The country is in much the same position as households. If Mr Goff were consistent, he would be asking his own bank for a mortgage on his home to invest in shares. If he is really contemplating that, I wonder what Mrs Goff thinks?

There's another way of looking at this - if it's a great idea to borrow $2 billion a year to invest because Goff thinks markets are at their bottom, why not borrow $40 billion? If that doesn't sound sensible, only $2 billion a year is just a smaller mistake.

It's scaremongering to suggest that the incomes of future retirees are put at risk by last week's decision. Task forces of the 1990s concluded that New Zealand is relatively well placed to afford all the costs of an ageing population, including pensions and health costs.

Taxes will increase because the number of retired people will about double but even then, in 50 years, New Zealand will probably be paying quite a bit less than some countries are paying today for their retired populations.

New Zealand can afford New Zealand Superannuation with or without the New Zealand Superannuation Fund, so we don't have to change superannuation just on account of the Budget's decision to suspend payments.

To suggest otherwise is to ignore the major independent reviews of 1992, 1997, 2003 and 2007.

That doesn't mean we have to preserve New Zealand Superannuation in all its respects for the next 50 years. In fact, the country needs a proper, research-led debate on whether the scheme that was set up, essentially, in 1938 is the one we should still have in 2050.

New Zealand Superannuation is one of the best Tier 1 pension schemes in the world but that does not mean it can't be made more appropriate for our changing society.

So perhaps we should start by asking how we can have the debate that we need. The Government had no real choice about suspending contributions to the super fund.

There are still cash deficits to finance, so why not sell the fund's assets to finance these?

This is a risk issue for the Government's balance sheet - we know the cost of debt but we don't know what the super fund's assets will be worth in one or 10 years' time. In theory, they should be worth more than the accumulated cost of debt, but that hasn't worked over the last seven years.

Maintaining financial assets in the presence of debt is the same, economically, as borrowing to invest. Part of the debate we now need must ask whether the Government should raise new loans when it has assets it can sell without affecting its core business.

* Michael Littlewood is co-director of the Retirement Policy and Research Centre, Auckland Business School, University of Auckland.